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Diane Francis Headshot

Buffett's Wrong: Stay Out of Stocks

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Smart money people like Warren Buffett are cherrypicking stock markets and the brilliant businessman from Omaha last week wrote that American investors should be doing the same.
Wrong and here's why:

The Omaha Oracle is wrong for you and me
Warren Buffett's recent op-ed piece in the New York Times made a brilliant point, but was straight from the value-investor, long-term viewpoint: Buy bargains now when everyone flees and hang on for awhile.
Far be it from me to contradict one of the world's greatest stock sages and business analysts. But I will.
Seems to me that we are in uncharted territory with this panic until the U.S. election is staged on November 4 and until the global community demonstrates that it is going to appoint sheriffs to patrol the global economy and stop the kind of jurisdictional arbitrage that led to the casino-ization of banking.

The hedge hangover

The other issue ruining stock markets right now is that they cannot fulfil their function which is to properly determine fair price for equities and debt. The reason for this is another global governance failure: the proliferation of unregistered hedge funds in secrecy havens without any disclosure as to their ownership or activities.
Hedge fund investors are allowed to, once a year, give notice to their fund managers that they want out. The first deadline was Oct. 1 and the second Nov. 1. In other words, these investors have declared they want their money back by the end of the year giving either 90 days' notice or 60 days'.

The regulatory and investor problem is that there are US$2 trillion in hedge funds run out of the U.S. alone and nobody knows the percentage of redemptions they have been received. As one trader told me on Wall Street one month ago: "the hedge redemptions are enormous which means that these funds will be selling stocks to get cash to meet redemption requests into every stock market rally."

That means the markets will rally, be pushed down again to lower depths, rise to lower depths only to be pushed down, thus creating even more problems as margined accounts are sold into the lower values, mutual fund investors panick and on and on.

In this scenario, there is absolutely no such thing as a reliable pricing mechanism. There is absolutely no way in knowing which stocks are going to be dumped -- usually the best. And there is no way in determining whether this gigantic, global unwinding is a permanent revaluation lower of the world's wealth. In other words, there is absolutely no guarantee that multiples or share values will eventually return to their peak prices.
For me, buying and selling should not be an option at least until the U.S. election and probably until January 2009.

The day after the Nov. 4 election the world will learn whether this crisis will be commandeered by Team McCain or Team Obama. The differences will be startling in their approaches. Much will also depend on the Congressional races: Will the Democrats dominate with a heavy-handed approach or will populists from both sides of the aisle, upset with the bailout, dominate, thus resisting interventions?